Due Diligence...More than Just a Home Inspection

Due Diligence…More Than Just A Home Inspection

By: Doug Henderson

Caveat Emptor- “Let the Buyer Beware.” This Latin phrase derived its origins into law dating back to an English (1603)  case known as Chandler V Lopus. In this case, the buyer (Lopus), bought from the seller (Chandler), a bezoar stone which was often believed to have mythical healing properties.  To the buyer’s dismay the stone contained no such healing properties and sued Chandler. The court’s ruled in favor of Chandler and thus established a legal theory for Caveat Emptor. 

While this case may have played out several centuries ago, Caveat Emptor still has deep implications in today’s world; particularly in the case of Real Estate purchases. For the longest time real estate purchase agreements had 3 options for the buyer to choose from: 1- “Repair Procedure” in which the buyer would have a home inspection done and could ask for repairs on certain items of the home. If  the seller agreed to the buyer's request for items to be repaired then  the parties would continue to closing. 2. “As Is” in which the buyer agreed to take the property as it sits without requesting repairs, etc from the seller. And then a third and barely ever used option of “Due Diligence” in which the buyer could take steps to check out all aspects of a property and if they found anything they did not like at all, could terminate the contract by giving a termination fee to the seller.  When all 3 of these options were available- “Due Diligence” was by and far the least of the options used and here is why. Seller’s were not often willing to accept an offer from a buyer when they knew that the buyer could have the property tied up for weeks (losing valuable marketing time), and then back out of the contract for any reason they saw fit. So for the most part Due Diligence was an unused option in the vast majority of purchase agreements. 

However- this all changed approximately a year ago when South Carolina's real estate contract eliminated all other options Except for “Due Diligence.” And as the title of this article states, doing due diligence is more than just a home inspection.  While the home inspection is a massively important part of Due Diligence there are other less obvious things at play that could result in thousands of dollars in expenses  that are vital to investigate so that the “Buyer can Beware” before signing on the dotted line. See case study below of a current real estate transaction that Heritage Coast Real Estate is representing the  buyer in.

THE ROLE OF THE REAL ESTATE AGENT CAN PLAY A PIVOTAL ROLE IN THE DUE DILIGENCE PROCESS.

CASE STUDY: BUYER BEWARE

The buyer was super excited to be looking for her first place. This had been a long time coming and as her and her fiance were getting closer to their wedding day they were anxious to get a place they could call home and start their life together.  They enlisted me to assist them with navigating the purchasing process. I was ecstatic to help them on such a monumental life event of finding their first home.  After some months working with them, we found the perfect spot, made an offer and it was accepted. Right after an  offer is  accepted there is a flurry of events that take place, but chief among them is the beginning of Due Diligence. During Due Diligence time is of the essence so it's important to jump on it quickly.  This is where me as the agent really leads the way in an effort  to flush out anything that may be an unforeseen issue that could negatively affect my buyer.  We jumped right on the home inspection and thankfully no major surprises there. But we were not done there.  This particular property is located within an HOA community. And sometimes, in HOA communities, the Board of Directors will issue a special assessment which each owner is responsible for if something is needed within the community and there are not enough funds to cover it in the general budget. This  “special expense" then gets split between all the owners in the community and each owner must cover their portion.  We were already aware  of the roofs being replaced so I really wanted to verify that there was no special assessment for this item. I reached out to the management company and was told they were unable to give me this information. For some that might seem surprising, but it's commonplace for management companies not to give information out to non-owners. So if the management company would not give me the information I needed, and if I did not want my buyer relying solely on the information provided by the seller's side, where do I go next to gather this information? I was able to track down the President of the Board of Directors who is also an owner in the community and approached him with my questions. He was able to verify there was no assessment for the roofs, BUT he did mention something about increasing insurance costs for the community.  If you are a homeowner along the coast or have dealt with property insurance in general lately you will know that costs have substantially gone up. Knowing that this could potentially be a major cost, I continued to pry.  As I did, the President was able to confirm that there would definitely be a special assessment for insurance, but they did not have the exact figure yet. He did note that their estimates were coming in around $3,600 per person and he felt confident it would be no more than that. Hmmmm- so here we are running out of time on due diligence, we are now aware of a special assessment, and have an estimated amount of what it will cost…So what is the solution to best protect the buyer?

Solution:

I let the buyer know about it and suggested the following solution.

 The closing attorney can withhold $3,600 from the seller’s proceeds at closing so that when the exact figure is named for the special assessment  the buyer can use that money to pay the assessment.  If the amount is less than the $3,600, the seller would be credited back the difference. If the amount was over, the buyer could use all the $3,600 to pay the assessment and then would be responsible for the balance. Or if the final assessment amount was named prior to closing the seller would take care of whatever that number was. 

By doing  due diligence and leaning on the theory of “Buyer Beware” we were able to save our client from having to come out of pocket for an additional $3,600 she was not expecting.  For anyone, especially a young couple starting off on their own, this was a huge sum of money we were able to save them by taking full advantage of the buyer's Due Diligence rights.

We are happy to report that both parties agreed to our suggestion and are moving forward!